Objective information about retirement, financial planning and investments

 

4 Benefits of Portfolio Rebalancing

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The past couple of years have been a roller coaster ride in the stock market. The S&P 500 lost 4.38% in 2018 mostly from a poor fourth quarter performance. The market recovered nicely in 2019 with the index posting a 31.49% total return for the year. This trend seemed to be continuing into 2020, with the index hitting a record high in late February.

Then the markets felt the impact of COVID-19. By late March the index had plummeted over 33% from its all-time high reached only a month prior. Since then, however, the stock market has recovered nicely with the S&P 500 closing at an all-time high yesterday.

The recovery in the markets has been an uneven one. Growth stocks have led the way, while value has largely lagged. Apple’s shares are up over 70% year-to-date, Amazon is up almost 78% and Microsoft is up over 36%.

With all of these gyrations among various asset classes over the past couple of years, you may be taking on more or less risk than is appropriate for your situation. If you haven’t done so recently, this is a good time to consider rebalancing your investments. Here are four benefits of portfolio rebalancing.

4 Benefits of Portfolio Rebalancing

Balancing risk and reward

Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

Portfolio rebalancing enforces a level of discipline

Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed.

This may seem counterintuitive but market leadership rotates over time. During the first decade of this century emerging markets equities were often among the top performing asset classes. Fast forward to today and their performance has been much more muted.

Rebalancing can help save investors from their own worst instincts. It is often tempting to let top performing holdings and asset classes run when the markets seem to keep going up. Investors heavy in large caps, especially those with heavy tech holdings, found out the risk of this approach when the Dot Com bubble burst in early 2000.

Ideally investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

A good reason to review your portfolio

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes a review of their individual holdings and the continued validity of their investment strategy. Some questions you should ask yourself:

  • Have individual stock holdings hit my growth target for that stock?
  • How do my mutual funds and ETFs stack up compared to their peers?
    • Relative performance?
    • Expense ratios?
    • Style consistency?
  • Have my mutual funds or ETFs experienced significant inflows or outflows of dollars?
  • Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors consider as they review client portfolios.

This type of review should be done at least annually and I generally suggest that investors review their allocation no more often than quarterly.

Helps you stay on track with your financial plan 

Investing success is not a goal unto itself but rather a tool to help ensure that you meet your financial goals and objectives. Regular readers of The Chicago Financial Planner know that I am a big proponent of having a financial plan in place.

A properly constructed financial plan will contain a target asset allocation and an investment strategy tied to your goals, your timeframe for the money and your risk tolerance. Periodic portfolio rebalancing is vital to maintaining an appropriate asset allocation that is in line with your financial plan.

The Bottom Line 

Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves.

How has the volatility in the stock market impacted your investments and your financial plan? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring for the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

7 Tips to Become a 401(k) Millionaire

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According to Fidelity in an update released in February of this year, the average balance of 401(k) plan participants stood at $112,300, up 7 percent from the balance at the end of the prior quarter. This data is from plans using the Fidelity platform. This came on the heels of significant gains in the stock market in 2019. It will be interesting to see how these numbers change in the wake of the market volatility from the fallout of COVID-19.

Fidelity indicates that about 441,000 401(k) participants and IRA account holders had a balance of $1 million or more, What is their secret? Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint. Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $19,500 and $26,000 for those who are 50 or over.

If you are just turning 50 this year or if you are older be sure to take advantage of the $6,500 catch-up contribution that is available to you. Even if your plan limits the amount that you can contribute because of testing or other issues, this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to a Fidelity study several years ago, the average contribution rate for those with a $1 million balance was 16 percent of salary. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site, it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full match if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance. I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you. Everyone’s situation is different, be sure you make the best investing decisions for your situation.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are in your 30s or 40s you should consider a portfolio more tailored to your situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different: you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 and recently ended with the market decline in the wake of the COVID-19 pandemic, is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn and have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance. The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts, the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job. Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan, make a decision. Leaving an old 401(k) account unattended is wasting this money and can hinder your retirement savings efforts.

The Bottom Line 

Whether you actually amass $1 million in your 401(k) or not, the goal is to maximize the amount accumulated there for retirement. The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Required Minimum Distributions in 2020 – What You Need to Know

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This was already a year of change for those impacted by required minimum distributions (RMDs). The SECURE Act signed into law at the end of 2019 includes some significant changes in RMDs starting in 2020. The CARES Act (passed in the wake of the coronavirus pandemic) included additional changes that apply only to 2020. Below is a discussion of some major changes for required minimum distributions in 2020 and what you need to know.

The CARES Act and RMDs

The CARES Act is a stimulus package geared in large part to providing relief for businesses, but it did contain some portions directed at individuals. One such piece is the waiver of RMDs for 2020.

This waiver includes 2020 RMDs for those who reached age 70 ½ prior to January 1, 2020 and were required to take them, this includes those who reached age 70 ½ in 2019 and who would have been required to take their first RMD on April 1 of 2020.

The waiver also applies to those who otherwise would have needed to commence their RMDs this year due to reaching the age of 72 as mandated by the rules in the SECURE Act. This effectively delays the commencement of their RMD a few years beyond their expectations prior to the SECURE Act.

The waiver applies to RMDs from IRAs, 401(k)s, 403(b)s and other types of retirement plans. Additionally, the waiver applies to those who would otherwise be required to take their RMD as the beneficiary of an inherited IRA.

Those who wish to make charitable contributions using the qualified charitable distribution (QCD) feature of their normal RMDs from an IRA can still do so. The amount donated to charity will still be exempt from federal taxes up to the donation limits. A benefit of doing this in 2020 is that it can serve to reduce their IRA balance and potentially lower the amount of future RMDs.

For those who have already taken their RMDs for 2020, the IRS recently issued new guidance on undoing these RMDs. For those who took their RMDs from January 1 through June 30, 2020, they can be repaid into a qualifying retirement account through August 31, 2020.

This means that any RMD taken in the first half of 2020 can be repaid into a qualifying retirement account. This will generally include an IRA, a 401(k), a 403(b) and another qualifying account. It doesn’t necessarily need to be repaid into the same account, though in the case of an IRA distribution going into an employer-sponsored retirement plan you will want to be sure that the plan will accept this money.

The one rollover per 12-month period limitation on IRAs will not apply to these rollovers. Note this relief does not apply to any distribution amounts that were taken in excess of what would have been your RMD amount for 2020.

Unlike the original rules on undoing RMDs, this now applies to beneficiaries who took an RMD from an inherited IRA. The funds taken from the inherited IRA must be redeposited back into the account from which they were taken in this case.

As with the original rules, RMDs that apply to a defined benefit pension plan cannot be undone, nor is there any CARES Act waiver for these RMDs.

For those who wish to or need to make withdrawals from their retirement accounts they can of course continue to do so. There were other changes to retirement accounts enacted under the CARES Act, including relaxed rules on 401(k) loans and on withdrawals from retirement accounts to help those impacted by COVID-19.

RMDs and the SECURE Act 

This was already a year of change for required minimum distributions. The SECURE Act raised the age to commence RMDs, called the required beginning date (RBD), from IRAs, 401(k)s and other retirement accounts from 70 ½ to 72 for those who turned 70 ½ on or after January 1, 2020. For those who would normally have commenced taking their RMDs in 2020 upon reaching age 70 ½, this pushed the requirement back by two years.

QCDs

The SECURE Act did not change the age for qualified charitable distributions from age 70 ½, so even though they do not have to take their RMDs until age 72, those who wish do so can still make a charitable contribution via a distribution from their traditional IRA account up to the $100,000 limit and the distribution will not be subject to federal income taxes.

Inherited IRAs 

One of the biggest changes for IRAs in the SECURE Act pertains to inherited IRAs. Non-spousal beneficiaries of inherited IRAs prior to January 1, 2020 could stretch these accounts using RMDs based on their life expectancy. To the extent the beneficiary was younger than the original account owner this could allow them to stretch the RMDs out for many years while the value of the IRA grew tax-deferred.

Under the SECURE Act, most non-spousal beneficiaries of an IRA will now be required to withdraw all funds from the account within a ten-year period. This means that in many cases a higher percentage of the account will go towards taxes than in the past. For example, if a parent passes their IRA to an adult child, that child will need to take a full distribution from the account within ten years and pay the income taxes that will be due. If this child is in their 40s or 50s and in their peak earning years, the amount of any distributions will be added onto their earned income and potentially be taxed at a much higher rate than they would have been in the past.

Beneficiaries, known as eligible designated beneficiaries, will still be able to take distributions from an inherited IRA using RMDs. These beneficiaries include:

  • Surviving spouses
  • A minor child of the deceased IRA account owner
  • A beneficiary who is no more than ten years younger than the deceased IRA account owner
  • A beneficiary who is deemed to be chronically ill

This provision is expected to result in changes to the estate planning of many IRA account owners in the coming years.

The Bottom Line 

Between the planned changes under the SECURE Act and the unplanned changes under the CARES Act, those normally faced with taking RMDs have a number of changes to be aware for 2020 and beyond. It’s a good idea to consult with your financial or tax advisor to ensure that you understand how these rules apply to your situation.

How has the volatility in the stock market impacted your investments and your financial plan? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring for the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

8 Portfolio Rebalancing Tips

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In light of the recent stock market volatility, it’s important to review your asset allocation and consider rebalancing your portfolio if needed. This post looks at some ways to implement a portfolio rebalancing strategy. Here are 8 portfolio rebalancing tips that you can use to help in this process.

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Set a target asset allocation 

Your asset allocation should be an outgrowth of a target asset allocation from your financial plan and/or a written investment policy. This is the target asset allocation that should be used when rebalancing your portfolio. 

Establish a time frame to rebalance 

Ideally you are reviewing your portfolio and your investments on a regular basis. As part of this process you should incorporate a review of your asset allocation at a set interval. This might be semi-annually for example. I generally suggest no more frequently than quarterly. An exception would be after a precipitous move up or down in the markets.

Take a total portfolio view 

When rebalancing your portfolio take a total portfolio view. This includes taxable accounts as well as retirement accounts like an IRA or your 401(k). This approach allows you to be strategic and tax-efficient when rebalancing and ensures that you are not taking too little or too much risk on an overall basis.

Incorporate new money 

If you have new money to invest take a look at your asset allocation first and use these funds to shore up portions of your asset allocation that may be below their target allocation. A twist on this is to direct new 401(k) contributions to one or two funds in order to get your overall asset allocation back in balance. In this case you will need to take any use of your plan’s auto rebalancing feature into account as well. 

Use auto pilot 

For those with an employer sponsored retirement plan such as a 401(k), 403(b) or similar defined contribution plan many plans offer an auto-rebalancing feature. This allows you to select a time interval at which your account will be rebalanced back to the allocation that you select.

This serves two purposes. First it saves you from having to remember to do it. Second it takes the emotion and potential hesitation out of the decision to pare back on your winners and redistribute these funds to other holdings in your account.

I generally suggest using a six-month time frame and no more frequently than quarterly and no less than annually. Remember you can opt out or change the interval at any time you wish and you can rebalance your account between the set intervals if needed.

Make charitable contributions with appreciated assets 

If you are charitably inclined consider gifting shares of appreciated holdings in taxable accounts such as individual stocks, mutual funds and ETFs to charity as part of the rebalancing process. This allows you to forgo paying taxes on the capital gains and may provide a charitable tax deduction on the market value of the securities donated.

Most major custodians can help facilitate this and many charities are set-up to accept donations on this type. Make sure that you have held the security for at least a year and a day in order to get the maximum benefit if you able to itemize deductions. This is often associated with year-end planning but this is something that you can do at any point during the year.

Incorporate tax-loss harvesting

This is another tactic that is often associated with year-end planning but one that can be implemented throughout the year. Tax-loss harvesting involves selling holdings with an unrealized loss in order to realize that loss for tax purposes.

You might periodically look at holdings with an unrealized loss and sell some of them off as part of the rebalancing process. Note I only suggest taking a tax loss if makes sense from an investment standpoint, it is not a good idea to “let the tax tail wag the investment dog.”

Be sure that you are aware of and abide by the wash sale rules that pertain to realizing and deducting tax losses.

Don’t think you are smarter than the market 

It’s tough to sell winners and then invest that money back into portions of your portfolio that haven’t done as well. However, portfolio rebalancing is part of a disciplined investment process.  It can be tempting to let your winners run, but too much of this can skew your allocation too far in the direction of stocks and increase your downside risk.

If you think you can outsmart the market, trust me you can’t. How devastating can the impact of being wrong be? Just ask those who bought into the mantra “…it’s different this time…” before the Dot Com bubble burst or just before the stock market debacle of the last recession.

The Bottom Line 

Portfolio rebalancing is a key strategy to control the risk of your investment portfolio. It is important that you review your portfolio for potential rebalancing opportunities at set intervals and that you have the discipline to follow through and execute if needed. These 8 portfolio rebalancing tips can help.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Is a $100,000 Per Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A recent CNBC article indicated that 58% of those who responded to a 2019 TD Ameritrade survey felt that a $1 million retirement nest egg would be sufficient to fund a comfortable retirement. This may or may not be the case depending upon your individual situation. To me it seems more meaningful to look at the level of income you’d like to generate in retirement and then determine if a given lump-sum, combined with other sources of retirement income, will support that income stream. Let’s take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years. This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool. At your own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule. This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide. Here are some ways this gap can be closed:

    • If they have significant assets outside of their retirement accounts, these funds can be tapped.
    • Perhaps they have one or more pensions in which they have a vested benefit.
    • They may have stock options or restricted stock units that can be converted to cash from their employers.
    • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
    • If they were business owners, they might realize some value from the sale of the business as they retire.
    • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
    • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

The scenario outlined above is hypothetical but very common. As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Roth IRA Conversion – A Good Idea for 2020?

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A Roth IRA conversion can be a good idea for many investors. Whether or not they are a good idea for you in 2020 or in any year will depend upon your unique situation. That said, 2020 is shaping up as a year where a number of factors that could make a Roth IRA conversion desirable for many people are all coming together.

What is a Roth conversion? 

A Roth IRA conversion is a conversion of some or all of the money in a traditional IRA account to a Roth IRA account. The funds converted will be taxed with the exception of value of any after-tax contributions made to the account.

A Roth conversion may also be an option within a 401(k) or a 403(b) plan that offers a Roth option. This will be subject to the rules of the plan, it’s best to check with the plan administrator.

Benefits of a Roth conversion 

The main benefit of a Roth conversion is typically the ability of the account owner to make tax-free withdrawals from the account in retirement if certain requirements are met. A related benefit is tax diversification for someone who holds the bulk of their retirement savings in traditional IRAs or 401(k)s.

From an estate planning perspective, Roth IRAs are not subject to required minimum distributions, which offers a number of advantages for those who don’t need to money from the distributions and who want to preserve their IRA accounts for their heirs.

Due to a combination of circumstances, 2020 might be a desirable year in which to do a Roth conversion if this strategy otherwise fits your situation.

Roth conversions in 2020 

Entering 2020, two factors were already in place that potentially make a Roth conversion desirable:

Based on the circumstances arising out of the coronavirus pandemic, two other factors have emerged in 2020 that serve to make a Roth conversion potentially desirable:

Let’s take a look at these factors in detail.

Lower tax rates 

The lower federal tax rates arising out of the tax reform that began with the 2018 tax year make it cheaper to convert to a Roth, all else being equal. Converting the same amount in 2020 will result in a lower tax bill than under the old tax rates.

The SECURE Act and inherited IRAs 

The SECURE Act drastically changed the rules for most non-spousal beneficiaries of inherited IRAs who inherit these accounts on or after January 1, 2020. In the past these beneficiaries could take required minimum distributions based on their own life expectancy. For beneficiaries who were younger than the original account owner, they were able to stretch out the benefits of tax-deferred growth of these accounts for a number of years.

With the rule changes, most non-spousal beneficiaries now must withdraw the entire value of the account within ten years and pay taxes on the withdrawals. This can vastly diminish the value of the account for these beneficiaries.

Inherited Roth IRAs are still subject to the 10-year withdrawal rule for most non-spousal beneficiaries, but there are no taxes on withdrawals if certain requirements are met.

The decision whether or not you want to do the Roth conversion during your lifetime in order to provide the benefit of tax-free withdrawals for your beneficiaries can be a complicated one. You will need to factor in your own tax situation, was well as the potential tax situation of your intended beneficiaries.

Lower account valuations 

At the time this was written, we’ve seen a significant drop in the stock market from its highs reached in February of 2020, though the market has erased some of these losses over the past couple of weeks.

The advantage of lower account valuations in doing a Roth conversion is that a higher percentage of the account’s value can be converted. For those who wish to convert their entire account they can do so and pay taxes on a lower conversion amount. This offers the potential for growth under the Roth umbrella with tax-free withdrawals of these appreciated funds in retirement.

The waiver of RMDs for 2020 

As part of the CARES Act, RMDs are waived for 2020 for IRAs, 401(k)s and other retirement accounts. This includes not only RMDs for the account holders, but also for inherited IRA account beneficiaries.

Where this can come into play in terms of a Roth conversion is instead of taking the amount of your RMD for the year, you might consider converting that amount to a Roth IRA. You will still pay the same amount in taxes; these dollars will now be in a Roth account allowed to grow tax-free and these dollars will not subject to an RMD for 2021 or beyond.

The Bottom Line 

If a Roth IRA conversion is right for your situation, 2020 is a good year to do the conversion. The factors mentioned above have created a favorable environment for Roth conversions. If you work with a financial advisor they can help decide if a Roth conversion is right for you and to make sure everything is executed correctly if you move forward.

Photo by Carlos Muza on Unsplash

Concerned about the stock market’s volatility? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting back on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement. We can design a full coaching program or do a one-time call to discuss your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

New Money Market Rules – How Will They Impact You?

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Update 3/22/2020 – This past week the Federal Reserve saw fit to prop-up money market funds in the wake of the economic turmoil from the coronavirus. Its important for investors to understand the rules surrounding any money market fund in which you hold money, either in your own account or within an employer-sponsored retirement plan like a 401(k). The original post below was posted on July 30, 2014.

The Securities and Exchange Commission (SEC) recently passed new rules governing money market funds. These rules are designed to combat liquidity problems should the economy experience another period of crisis such as in 2008. Here are a few items from these new money market rules that might impact you.  You might also check out this excellent piece by Morningstar’s John Reckenthaler.

Floating NAV – Institutional Money Market Funds 

For institutional money market funds the stable $1 net asset value (NAV) per share will be gone. The NAV of these funds will be priced out to four decimal places and will be allowed to float.  Your shares may be worth more or less than what you paid for them upon redemption.

Again this applies to institutional money market funds. Retail money market funds, defined as funds owned by natural persons, along with government and Treasury-based money funds will retain their stable $1 NAV. From what I have been told, money market funds owned by participants within a 401(k) or similar retirement plan are considered to be retail funds as well. I’m not quite as sure with regard to an institutional share class money market fund held by an individual investor.

Liquidity Fees and Redemption Gates 

Both retail money market funds, again excluding funds investing in government and Treasury instruments and institutional funds, will be subject to liquidity fees and redemption gates (restrictions) under certain circumstances.

  • If liquid assets fall below 30%, a fund’s board may impose a 2% fee on redemptions.  This is at their discretion.
  • If liquid assets fall below 10%, a fund’s board must impose a 1% fee on redemptions.  This fee is mandatory under the new rules.
  • If liquid assets fall below 30%, a fund’s board may suspend redemptions from the fund for up to 10 days. 

How will these new money market rules impact you? 

Money market funds will have two years from the date the final SEC rules appear in the Federal Register to be in compliance with the floating NAV, liquidity fee, and redemption gate rules.

According to Benefits Pro:

“Nearly $3 trillion is invested in money-market funds. As of July 3, 2014, more than $800 billion was held in the institutional money-market funds affected by today’s reforms, according to the SEC.” 

Among the main users of institutional money market funds would be pension plans, foundations, and endowments. They will be the ones directly impacted by the change to a floating rate NAV; however the beneficiaries of these funds will ultimately be impacted should this change have a negative impact on the underlying portfolio.

The liquidity fees and redemption gates will directly impact individual investors.

A 1% or 2% fee on redemptions would be quite a hit to your balance, especially if viewed in terms of today’s interest rates on money market funds in the range of 0.01%.

The ability to delay redemptions up to 10 days could also have an impact especially if you had written a check off of that account to pay your mortgage or some other bill.

The true test will be if we experience the extreme conditions like those that marked the 2008-09 economic downturn. None the less as an investor it would behoove you to ask your bank, custodian, or financial advisor how these changes might impact any money market funds you hold and also if it makes sense to switch to another cash option.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit: NoONBRAND on Unsplash

Five Things to do During a Stock Market Correction

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The impact of the coronavirus on the stock market and our economy has been devastating. The major stock market indexes are off 25% or more. This has impacted the investments of all investors. Those nearing or in retirement are really feeling the pinch in many cases. Delays or cancellations of events and the closure of many businesses will have an impact on the lives of many people as well. Nobody can predict how long this will all last. Regardless, here are five things you should do during a stock market correction.

Do nothing

Assuming that you have a financial plan with an investment strategy in place there is really nothing to do at this point. Ideally you’ve been rebalancing your portfolio along the way and your asset allocation is largely in line with your plan and your risk tolerance.  You should continue to monitor your portfolio and make these types of adjustments as needed. Making moves in reaction to a stock market correction (official or otherwise) is rarely a good idea.  At the very least wait until the dust settles.  As Aaron Rodgers told the fans in Green Bay after the Packers bad start in 2016, relax. They went on to win their division before losing in the NFC title game.  Sound advice for fans of the greatest team on the planet and investors as well.

Review your mutual fund holdings

I always look at rough market periods as a good time to take a look at the various mutual funds and ETFs in a portfolio. What I’m looking for is how did they hold up compared to their peers during the market downturn. For example during the 2008-2009 market debacle I looked at funds to see how they did in both the down market of 2008 and the up market of 2009. If a fund did worse than the majority of its peers in 2008 I would expect to see better than average performance in the up market of 2009. If there was under performance during both periods to me this was a huge red flag.

Don’t get caught up in the media hype

If you watch CNBC long enough you will find some expert to support just about any opinion about the stock market during any type of market situation. This can be especially dangerous for investors who might already feel a sense of fear when the markets are tanking.  I’m not discounting the great information the media provides, but you need to take much of this with a grain of salt. This is a good time to lean on your financial plan and your investment strategy and use these tools as a guide.

Focus on risk

Use stock market corrections and downturns to assess your portfolio’s risk and more importantly your risk tolerance. Assess whether your portfolio has held up in line with your expectations. If not perhaps you are taking more risk than you had planned.  Also assess your feelings about your portfolio’s performance. If you find yourself feeling unduly fearful about what is going on perhaps it is time to revisit your allocation and your financial plan once things settle down.

Look for bargains

If you had your eye on a particular stock, ETF, or mutual fund before the market dropped perhaps this is the time to make an investment. I don’t advocate market timing but buying a good long-term investment is even more attractive when it’s on sale so to speak.

Markets will always correct at some point.  Smart investors factor this into their plans and don’t overreact. Be a smart investor.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Austin Distel on Unsplash

Annuity Sellers Love Stock Market Turmoil

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Update 3/11/2020 – We are in the midst of the worst stock market turmoil since the financial crisis in 2008, due to the coronavirus and related disruptions in the economy. It’s times like these that can fuel fear-based selling tactics by many who sell annuities. I have absolutely nothing against annuities, but I feel that no financial product should be purchased based on fear. It will be interesting if the pattern of these fear-based tactics that we’ve seen in the past materializes in this volatile stock market environment.

Just like clockwork if we see a prolonged period of volatility you can count on a new wave of ads touting various types of annuity products as the answer for investors worried about the stock market. Annuity sellers love stock market turmoil. Those of you who follow my blog know that I have a special level of contempt for those who sell financial products by invoking fear.

Stan Haithcock wrote Annuity sharks smell blood with market volatility recently at Market Watch. This was one of those articles that after reading it led me to wish I’d written it.  Stan’s opening paragraph provides a great overview.

“Any time the stock market has a bad week or experiences extreme volatility, the annuity sharks start smelling blood in the investment waters and will be on the attack to lock your money into their “perfect product.” Current indexed- and variable-annuity sales pitches can sound enticing and almost too good to be true, so it’s important to keep your head and understand the contractual realities and proper uses for annuities in a portfolio.” 

Mike Ditka and Indexed Annuities

My dislike of fear-mongering annuity ads started a few years ago when the local news radio station was full of ads touting indexed annuities as the cure for the risky stock market. The group enlisted former Bears coach Mike Ditka as their pitchman. Ditka can probably sell anything to the win-starved fans of the Chicago Bears.

I personally think using any celebrity spokesperson to sell financial products is reprehensible and takes something as serious as someone’s financial well-being and equates it to the decision of which snack food to buy.

Indexed Annuities 

Though I’ve tried to keep an open mind about these products, I’ve reviewed many contracts over the years and have never found one that seemed to have much redeeming value for the contract holder. By this I mean I’m not sure what the product does for them that a properly diversified investment strategy with a well-conceived retirement income plan couldn’t do just as well or better for a whole lot less money.

Indexed annuities, sometimes called equity-indexed annuities, offer limited upside participation in a stock market index such as the S&P 500. The reason they are sold as an alternative to the risky stock market is they offer either a guaranteed minimum return each year or a limit on how much of a loss the contract holder can incur each year. The sales pitches will vary and they are often also touted as an alternative to CDs.

A few things to be leery of if you are being sold one of these products:

  • Long surrender periods. I’ve seen policies where the surrender charges last for 10 years or more.
  • High fees and commissions. The fees internal to the contract serve to provide nice compensation to those selling them. Why do you think agents and registered reps are so eager to sell you an indexed annuity?
  • Hard to understand formulas to determine your return. The premise is typically that you will participate in a portion of any gains on an underlying market benchmark such as the S&P 500 and that there is some minimum amount of return that you will make no matter how the index performs.  Make sure you understand the underlying formulas that determine your return and any factors that might cause a change in the formula.  Check out FINRA’s Investor Alert on Indexed Annuities as well.
  • Limited upside participation in the underlying index.

Additionally the sales pitches can be confusing. Make sure you understand what you would be buying, all of the underlying expenses and most important why this is the BEST solution for you.

Variable annuities and riders 

Variable annuities generally have underlying investment choices called sub-accounts that function like mutual funds. They also have internal fees called mortality and expense charges that cover the insurance aspect of the contract. These fees can vary all over the board. Many contracts also carry surrender charges for a number of years from the issue date as well.

While the value of the VA will vary based upon the investment results, several riders or add-ons can create certain product guarantees. These riders come at a cost and that cost will impact how long it takes for the contract holder to come out ahead.

Two popular living benefit riders are guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum income benefits (GMIB).

A GMWB rider guarantees the return of the premium paid into the contract, regardless of the performance of the underlying investments via a series of periodic withdrawals.

A GMIB rider guarantees the right to annuitize the contract with a specified minimum level of income regardless of the underlying investment performance.

Both types of riders entail added costs and require varying time frames to be eligible for exercise and/or to recover the cost of the rider.

A variable annuity with or without one of these riders may be the right choice for you. You are far better off shopping around for the best product versus allowing yourself to be sold via a slick sales pitch.

The Bottom Line 

Renewed market turmoil means a new wave of annuity sales pitches reminding prospects how risky stocks can be. Financial planning should always trump the sale of any financial product so investors who are worried about the volatility in the stock market will generally be better served by having an overall financial plan in place from which the appropriate products for implementation will flow.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

4 Things To Do When The Stock Market Drops

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Update February 24, 2020 approximately 6:00 p.m. – the market closed today with the Dow losing almost 1,032 points or 3.6%. This was the third time in history that the index declined 1,000 or more points in a single day. This is the worst single day loss for the index in both points and percentage decline since February 8, 2018. The S&P 500 lost about 3.4% today. For both indexes today’s losses erased their gains for 2020 to date.

This morning as I update this, the stock market is appears poised to take a hit prior to the open. The Dow’s pre-market implied open is down over 730 points. This seems to be largely due to fears about the possible spread of the Coronavirus from China. Of course nobody knows where the market is headed. What should you do now? Here are 4 things to do when the stock market drops.

4 Things to do When the Stock Market Drops

Breathe 

Cable news networks like CNBC have a field day during steep, sudden stock market corrections like we will likely see today. It’s easy to get caught up in all of this hype. Don’t let yourself be sucked in.

Step back, take a deep breath and relax.

Take stock of where you are 

Review your accounts and assess the extent of the damage that has been done. Investors who are well-diversified may be hurt but generally not to the extent of those who highly allocated to stocks.

Review your asset allocation 

With the tremendous year for stocks in 2019 and so far in 2020, many investors are likely still in a good position. If you haven’t done so recently, then perhaps it is time to review your asset allocation and make some adjustments. Proper diversification is great way to reduce investment risk. This is a good time to rebalance your portfolio back to your target asset allocation if needed as well.

Go shopping 

Market declines can create buying opportunities. If you have some individual stocks, ETFs or mutual funds on your “wish list” this is the time to start looking at them with an eye towards buying at some point. It is unrealistic to assume you will be able to buy at the very bottom so don’t worry about that.


Before making any investment be sure that it fits your strategy and your financial plan. Also make sure the investment is still a solid long-term holding and that it is not cheap for reasons other than general market conditions.

The Bottom Line 

Steep and sudden stock market declines can be unnerving. Don’t panic and don’t let yourself get caught up in all of the media hype. Stick to your plan, review your holdings and make some adjustments if needed. Nobody knows where the markets are headed but those who make investment decisions driven by fear usually regret it.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.